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Two stocks you should steer clear of
Stock #1 – Steinhoff 2.0
Back then the share price was 862c. Today the share price 193c – that’s a drop of 77.6%.
But I don’t think the company is any more investable today than it was back then.
You see, in the company’s latest SENS announcement it showed an increase in headline losses from the previous year’s NAD 68.95 million to more than NAD 200 million in losses.
Headline loss per share is between 12.62c and 13.78c.
Simply put – for too long the company has depended on using fair value adjustments and “paper” transactions to make its profits look good.
And the current pandemic and tough economy has made it impossible for it to report these paper profits. Now there’s not much left to it.
When I wrote about it in June 2019 operational revenue was down from R801 million in 2018 to R494 million in 2019.
In its latest results (interim results) the company shows a revenue of between R185 million and R212 million. So compared to 2019 levels revenue is still down – annualised this revenue figure comes to only R424 million.
At its current 193c share price Trustco is still valued at R3.1 billion. At a very generous 30% profit margin on R400 million annual revenue the company would make a R120 million profit. That would put it on a PE ratio around 25 – and the company at best is worth a 10x earnings multiple… I’d say the share price could easily halve from current levels.
ARE YOU STRUGGLING AS A TRADER?
The consequences are dire:
• The money you lost with NO proven plan
• The fear you have each time you’re about to take a trade
• The plunging portfolio, when you hold onto losers too long
• The extra profits missed, when you close your trades too soon
• The panic and zero confidence, when you keep trading on beliefs
• No portfolio growth, as you’re not using the power of compounding
LET’S STOP THE STRUGGLE TODAY!
Stock #2 – A recovery that’s been overdone
Brikor is a long struggling small cap company. But the share price is up 511% in the past twelve months. So there’s a lot of investors really interested in it.
Brikor manufactures bricks and supplies them to the construction sector.
The company’s share price basically flatlined at 9c per share for more than 5 years before its astronomical rise up to 200c on 5 May 2021.
Since then it’s pulled back to 55c.
But the share price is still too high.
Net asset value per share is 12.8c. Headline earnings per share is 2.1cps – which puts it on a PE ratio of 26.2. A recent acquisition by the company of a transport business is positive. But half of the acquisition cost was paid using 193 million shares at an acquisition price of 15cps. That means the directors weren’t even convinced that the company’s current share price is worth holding out for a better offer. The rest of the acquisition price will be credited to a loan account and Brikor will repay it in monthly instalments of R500,000 each. At best the deal can put the company on a PE of 17.35.
The company’s PE should be around 11 – which puts a maximum target price on it of around 35c – or around 35% downside from its current price.
So what should you buy?
As I’ve been telling my Red Hot Penny Share readers, the JSE has not had such great small cap investment opportunities since the 2008 crisis.
But as I’ve highlighted above, you need to know what to look for.
Earlier this month I released my top five small cap big income stocks
you should consider now as they are offering double, even triple upside potential on their current share prices and they are GOOD companies. If you want to get details on these five companies and my research, you can claim a copy absolutely free.
Here’s to unleashing real value
Editor, Red Hot Penny Shares